1. SMALL BUSINESS MANAGEMENT Chapter 7 Financing the Small Business

2. Class notes

3. Cottage Cheesecake Industry • What aspects of Brad Miller's background would be positive for him to obtain financing for his business? What aspects would be negative? • What are the advantages and disadvantages of equity financing for this business? • What other sources of financing might he have accessed? Cottage cheese cake

4. Small Business Financing • Reasons For Financing of Ongoing Operations • New Products and Services • Acquisition / Joint Venture • Expansion • Capital expenditures • Working capital needs

5. Small Business Financing • Other management problems affecting financing • underestimating financial requirements • lack of knowledge of sources of equity and debt capital • lack of skills in presenting a proposal for financing • failure to plan in advance for needs • poor financial control of operations

6. Determining the Amount of Funds Needed • Start-up Costs • Ongoing Operating Costs • The Owner’s Net Worth Capital requirements = start-up costs + operating requirements – owner assets available for investment

7. Determining the Amount of Funds Needed • Start-up Costs • Initial inventory, hiring costs, physical space • First few months rent, payroll, advertising • Prepaid items --utility & rent deposits, insurance • Licenses & permits • Ongoing Operating Costs • Prepare cash flow statement (chapter 10) • The Owner’s Net Worth

8. new business is a retail establishment promotion, you plan to give buyers 90 days to pay Buy replacement inventory Buy initial inventory + plan for this working capital need in advance, If not,you probably won't even stay in business for 90 days.

9. Determining Types of Financing • Equity (Ownership) Financing • Private Investors • Self, bootstrapping, friends, family, private, employees, sale of shares • Corporate Investors • Venture capitalist (vulture capitalists) • Government • Business Development bank of Canada (BDC) • Canada Development Corporation (CDC) • Provincial Programs Surviving High Tech

10. Advantages of Equity Financing • no obligations for dividends or interest • investor expertise • equity expands borrowing power • equity spreads risk of failure

11. Disadvantages of Equity Financing • dilutes ownership and independence • Disagreements • Compromises • legal costs

12. Debt Financing • Advantages • Obtain higher ROI by using leverage debt • Interest costs are tax deductible; dividends from equity are not • No loss of ownership control and greater flexibility with debt financing • Easier to obtain than equity capital

13. sold purchase sold-- $110,000 Profit= $110K-$100K Profit --$10,000 Cost-- $100,000 Invest --$100,000 sold purchase sold-- $110,000 Profit= $110K-$100K Profit --$10,000 Cost-- $100,000 Invest --$10,000 Financial leverage Return on Investment ROI = $10K/$100K = 10% Return on Investment ROI = $100K/$100K = 100%

14. Debt Financing • Disadvantages • Interest must be paid on borrowed money • Increased paperwork requirements and lender monitoring • Total risk on part of the owner

15. Sources of Debt Financing • Private lenders • shareholder loans • Corporate lenders • regular private lending institutions • trust companies, credit unions, finance companies • chartered banks • Government Lenders • May finance high debt , low equity firms • May be flexible, lower rates, counseling • More paper work, time to process is longer, more monitoring & control

16. Determining Terms of Financing • Types • Short term (demand), medium term, long term • Sources • banks, private sources, factors, confirming houses; term lenders, leasing companies, foreign banks; trust companies

17. Preparing A Proposal to Obtain Financing • Criteria Used in the Loan Decision • 1. The Applicant’s Management Ability • How much the applicant knows about the business • How much care was taken in preparing the proposal • Lending proposal document (fig 7-10) • cash flow & income statement & Balance sheet ( chapters 3 & 10 ) • Owners Salary & contingencies

18. Preparing A Proposal to Obtain Financing • Criteria Used in the Loan Decision 2.The Proposal • level of working capital • Current assets – current liabilities • current ratio 2:1 • quick ratio 1:1 • debt-to-equity ratio • Collateral

19. Preparing A Proposal to Obtain Financing • Criteria Used in the Loan Decision • 3. Applicant’s background and creditworthiness • personal information • present debt and past lending history • amount of equity the applicant has invested • will the applicant bank with the lender • Lender Relations

20. Clarks Sporting Goods • Q 1. Estimate how much money Dave will need from outside sources to start his business. • Q 2. Assuming Dave receives start‑up financing from a bank, as calculated in question 1, will he require an operating line of credit during the first four months of operation? If so how much? • Q 3. Should Dave pursue debt or equity sources of funds to get started?

21. “ Avery Wine “ or Lotus Land • What aspects of David & Liz Avery’s background would be positive for them to obtain financing for their business? What aspects would be negative? • What are the advantages and disadvantages of equity financing for this business? • What other sources of financing might he have accessed? BrandMan

22. Appendices • Provincial Equity Capital Programs • Federal Government Assistance Programs for Small Business • Provincial Government Financial Assistance Programs and Agencies for Small Business • Venture Capital Firms in Canada